Levi Strauss & Co.’s (LS&Co.) Q1 earnings call Wednesday reveals a healthy denim market, with Levi’s flexing herculean strength.
“Levi’s is growing,” said Chip Bergh, LS&Co. president and CEO. “We are bigger than the No. 2, No. 3 and No. 4 brands combined on a global basis…We are growing share. We are picking up new consumers.”
Despite a $60 million supply chain hit impacting net revenues, LS&Co. reaffirmed expectations for fiscal 2022, with net revenue forecast to grow 11 percent to 13 percent compared to 2021, to $6.4 billion to $6.5 billion, with adjusted diluted earnings per share (EPS) projected at $1.50 to $1.56.
Net revenue for the first quarter ended Feb. 27 increased 22 percent to $1.6 billion versus the same period in 2021 driven by strong growth across all geographical segments. Global wholesale net revenues grew 15 percent versus the comparable period in 2021, reflecting strong demand for the Levi’s brand. The brand’s top 10 key strategic accounts collectively grew at an even faster pace, Bergh said. Levi’s U.S. wholesale business grew 23 percent, achieving its highest first-quarter revenues in over a decade.
That high level of success is leading to larger partnerships. Bergh said Levi’s doubled its premium business with Nordstrom where the women’s line has outperformed other brands. “Furthermore, we’re benefiting from more favorable floor space at key customers, and we are selectively increasing distribution in key wholesale specialty accounts aligned with younger consumers like Urban Outfitters,” he said.
Levi’s will also be in 300 additional Target stores this spring. “With the expansion, we will be showcasing the strength of the brand and introducing 60 plus new styles for both men and women,” he said. “We’re picking up incremental new consumers to the Levi’s brand at Target and we’re excited about these expansion plans.”
Global direct-to-consumer (DTC) net revenue was up 35 percent year over year, reflecting a 48 percent gain in company-operated stores as consumers return to in-person shopping, and a 10 percent rise in e-commerce. Though still down from before the pandemic, Levi’s is seeing traffic in tourist-dependent locations beginning to recover. Bergh said global brick-and-mortar growth was driven by both mainline and outlet stores in all geographical segments due to improved traffic trends and higher AURs.
“We continue the rollout of our Next Gen stores, destinations where consumers can find our most elevated brand expression and personalized experience,” he said. “These stores are showing encouraging results like Northpark Mall in Dallas, which in its second month of operation, was the most productive store in our U.S. fleet.”
The company is also expanding its digital presence. “The Levi’s app continues to show positive results with monthly active users more than doubling in the quarter as well as [an] increase in traffic and conversion across the U.S. and Europe,” Bergh said. “In Q2, the app will be rolled out to India and several European countries with further expansion later in the year.”
Despite prices increasing at Levi’s, Bergh said the brand is up 11 percent versus pre-pandemic levels from two years ago and brand unit volume has returned to 2019 levels. In fact, Levi’s grew 20 percent, with the brand’s top five markets outperforming, Bergh said.
Half of the brand’s growth comes from volume growth and the other half from AUR growth driven by the higher prices.
“We took select pricing actions last year as well as early this fiscal year and we believe there remains additional headroom to raise prices in parts of our portfolio through the balance of this year and beyond as we continue to innovate and lead trends,” he said.
The brand has not seen “any real pushback” on pricing at all at this point. Nor does Bergh believe consumer spending has peaked.
“The U.S. consumer is still in a very good place and their personal balance sheets are still in a good place. Consumers put a lot of money in the bank during the pandemic and most of that has not come out right yet,” he said. “And consumer confidence in March was higher than in January and February and back to almost pre-pandemic levels.”
Levi’s men’s business experienced “exceptional growth” with bottoms up 24 percent representing the category’s highest first-quarter revenue in over a decade. Levi’s women’s bottoms also grew, up 21 percent versus the prior year.
On point products are key to this uptick, especially styles that address the trend for looser fits. In December, Levi’s introduced its first circular 501 jean designed to be recyclable and made with organic cotton and post-consumer recycled denim. It also introduced a slouchier women’s 501 inspired by ’90s fits and has several more from the decade in the pipeline for fall.
The circular 501, Bergh noted, is “just one new addition to the looser fit denim trend we started that is driving significant growth in our bottoms business and represents roughly half of both our women’s and men’s bottoms assortment.”
Sales for the iconic 501 were up almost 50 percent in the quarter as Gen Z becomes acquainted with the style.
“When your most iconic item is growing like that, it says something about the overall strength of the brand,” Bergh said. “And it’s not just in one market. This brand…I would say very confidently, has never been stronger than this. And I would say semi-confidently, this is the strongest the brand has ever been on a global basis.”
World Retail Congress
Bergh echoed these sentiments at the World Retail Congress in Rome Thursday. In a keynote interview, the executive described how factors like sustainability and technology are shaping the industry and LS&Co.’s internal team.
“Sustainability used to be pretty niche from a consumer standpoint and very Europe-centric. Now it’s truly global and cuts across generations. The young consumer [is] really focused on this. If you ask a teenager today, they will very likely say climate change is top of mind in terms of their concerns,” he said.
While digital technology is commonly linked to youth, the global pandemic shutdown underscored how it can streamline how business gets done.
“With the pandemic everybody’s stores shut down and everybody did the hard pivot to e-commerce but when I say the rapid move to digitization, it’s more than e-commerce and building out those digital capabilities for the consumer,” Bergh said. “There’s so much of our business that can be digitized, everything from how we design product to how we manage getting product to store. All of that can be digitized and take out time and touches, dramatically [simplifying how] business is done.”
Despite technology’s ability to connect globally, Bergh said he believed “globalization is dead.”
“We’re going to see more manufacturing shifting closer to market because of the importance of that agility and responsiveness and having confidence that the product is going to be on the shelf in store when you need it to be,” he said, adding that the days of chasing the lowest cost around the world are coming to an end.
Bergh also doubled down on his pledge to create a more diverse organization and acknowledged the “brutal truth” that gaping inequalities remain, particularly in the U.S.
“When I joined the company 10 years ago, the house was on fire. The company had nearly gone bankrupt a couple of years earlier. The brand was stagnating, we weren’t growing, profits were pretty terrible,” he said. “It was a business turnaround and when we were developing the strategy the idea of focusing on diversity and inclusion came up, but I deprioritized it.”
Though the company showed slight improvements in its recently published first diversity and inclusion report, Bergh said he missed the mark. “Looking back, it was one of the biggest mistakes I made in my 10 years here as, in my heart and soul, I believe that a diverse organization will outperform a homogenous one every time,” he said.